Executive Summary. Although real estate represents a substantial proportion of the U.K. investment market, research in this area is extremely limited. This is particularly true of the performance and construction of portfolios. This paper deals with one of the major issues that confronts both investor and advisor; namely, how effective is the diversification of a real estate portfolio as more properties are included. The analysis is undertaken at an empirical level and draws on similar research developed in the stock market. The main findings are that the low correlation between returns on individual properties enable high levels of risk reduction to be achieved. This correlation structure does, however, impose a penalty, making it extremely difficult to construct highly diversified portfolios. The problem is exacerbated by the indivisibility of real estate assets.
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Gerald R. Brown (1997) studied this question.